Supervisory efficiency and collusion in a multiple-agent hierarchy

Xiaogang Che, Yangguang Huang and Le Zhang

Games and Economic Behavior, 2021, vol. 130, issue C, 425-442

Abstract: We analyze a principal-supervisor-two-agent hierarchy with inefficient supervision. The supervisor may collect an incorrect signal on the agents' effort levels. When reporting to the principal, the supervisor may collude with one or both agents to manipulate the signal in exchange for a bribe. In the hierarchy, we identify a new trade-off between inefficient supervision and supervisor-agent collusion: Due to the incorrect supervisory signal, truthfully reporting the supervisory signal under collusion proofness may mistakenly punish the agents. As a result, allowing a certain type of collusion helps correct the incorrect signal and provides a higher incentive for the agents to work. We characterize the optimal no-supervision, collusion-proof, and collusive-supervision contracts, and show that the collusive-supervision contract dominates the others when supervisory efficiency is at an intermediate level.

Keywords: Three-level hierarchy; Collusion; Supervisory efficiency; Multiple agents; Optimal contract (search for similar items in EconPapers)
JEL-codes: D73 D82 D86 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:130:y:2021:i:c:p:425-442

DOI: 10.1016/j.geb.2021.09.003

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